Housing: The Other Big Problem

The hefty 8-million jobs lost during the Great Recession won’t easily or quickly return, as Robert Reich reminds in today’s Wall Street Journal. But at least there’s hope that the March gains in the labor market signal that recovery has begun. Maybe. Even if that’s true, questions still abound for the other elephant weighing on the economy—housing.

If the the long journey of job growth is set to begin, will housing be a help or a hindrance? The answer matters because housing is such a large and influential factor for household balance sheets. “Housing is a mainstay of the U.S. economy, consistently accounting for more than one fifth of the gross domestic product (GDP),” writes Alex Schwartz, chairman of the New School’s Department of Urban Policy Analysis and Management, in his book Housing Policy in the United States.

Unsurprisingly, the research literature finds a strong link between housing and economic growth. Common sense suggests no less. “A healthy pickup in housing starts depicts an economy that is robust…,” notes economist economist Bernard Baumohl in The Secrets of Economic Indicators.

Based on what we know today, however, the signals are mixed. Indeed, housing starts appear to be bottoming out, but it’s not yet obvious that growth on a sustainable basis is near. Economist Robert Shiller weighs the pros and cons in yesterday’s New York Times, explaining,

The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Correcting for seasonal effects, home prices as measured by the S.&P./Case-Shiller 10-City Home Price Index increased each month from June 1995 to April 2006, then decreased almost every month to May 2009. Since then, they have risen through January, the latest month for which data is available.

So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so?

If only it were that simple.

Home price booms and busts do end, sometimes quite suddenly, as was the case for the boom of 1995 to 2006 and the bust of 2006 to 2009. Today, we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market.

Worrying about repairing the housing market is old news, of course. Back in January, for instance, The Washington Post ran a story that advised: “Housing recovery could take a decade, economists warn.”

Nonetheless, we should be careful about generalizing, which only goes so far when it comes to housing. Real estate markets, in other words, tend to be local beasts and so speaking in broad terms minimizes the wide disparity in activity from region to region. Those areas that witnessed the greatest boom during the glory days are likely to suffer the longest. As HousingWirereported last week,

Housing markets that experienced the greatest inflation in house prices — including certain metro areas in sand states California, Florida, Arizona and Nevada — will not see a return of peak-level home prices before 2025, according to financial services technology provider Fiserv.

But if some areas are under above-average market strain, it’s no surprise to learn that other regions are expected to fare relatively better. Housing prices for Columbus, Ohio, for instance, are expected to stop falling within a year and return to the 2006 peak sometime in 2014, advisesColumbus Business First. And Dallas-Fort Worth housing starts “soared in the first quarter from a year earlier, signaling recovery in the local home-building industry,” reports the Star-Telegram.

Perhaps the burning question these days is whether the economy drives the housing market–or is it the other way around? Hanley Wood Market Intelligence, a real estate consultancy, explains that “the rate of GDP growth is very important to the housing market, not only because it measures the strength of the economy, but also because the variance from what is considered to be the long-term achievable growth rate influences Federal Reserve policy, which directly affects mortgage rates.”

Housing is a sector that is receiving tremendous support from the government — at all levels, whether it’s through FHA financing or home-buyer tax credits, or the fact that the Federal Reserve for the first time ever took a trillion dollars of housing loans onto its balance sheet. And yet with all of that, whatever recovery we’re seeing in the housing market is extremely feeble. I mean we just came off a month where new home sales were at a record low. When you look at housing starts, take a look at a 50-year chart of housing starts — it’s extremely difficult to see any recovery taking place at all. At best we’re forming a bottom in housing, and that’s after massive government aid.

Housing will, of course, recover at some point, but when? Members of the Fed’s interest-rate-setting FOMC seem inclined to err on the side of caution. In last month’s meeting, the FOMC lowered its outlook for GDP growth, in part because of sideways activity in housing construction. “Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity, according to FOMC minutes from March. Expectations on foreclosures, meantime, isn’t all that encouraging either, as the minutes relate:

[FOMC] Participants indicated that the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters. Moreover, the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices.

What will it take to convince the Fed, and everyone else, that a recovery worthy of the name is taking root in housing? Encouraging numbers, of course. For the moment, we’re a bit light on this front. But there’s always a fresh batch of statistics on the way, providing another opportunity to blow away the real estate blues. That includes this Friday’s update on housing starts for March. The consensus forecast calls for a modest rise of 25,000 to 610,000, according to Briefing.com.

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.